Single-tranche collateralized loan obligations securitized through total-return swaps and cash-synthetic hybrid CLOs are gaining popularity as documentation for U.S. loan-only credit-default swaps nears completion.
Fitch Ratings and Moody's Investors Service have seen a dramatic pickup in TRS and hybrid deals, structured by firms including Citigroup, Bank of America, Credit Suisse and Lehman Brothers. Structurers at these firms confirmed they are working on deals, but would not comment further.
"We are starting to see a resurgence in the U.S. and in Europe," said Tania Cunningham, senior director in the credit products group at Fitch in New York, explaining bank loan total-return swap CLOs have been around since the late 1990s. Analysts declined comment on precise numbers of deals they are rating, but noted the number is significantly up from previous years.
Cunningham attributed the renewed interest to an International Swaps and Derivatives Association and Loan Syndications and Trading Association project targeting standardized documentation which is expected to be finalized Monday. Dealers are eager to jump into the synthetic loan space and many have begun trading single-name LCDS on the un-finalized document. Several banks are even reported to be trying to structure 100% synthetic CLOs, but those projects have stalled because of liquidity and pricing challenges.
"The next movement will be toward [100%] synthetic CLOs, facilitated by the ISDA documentation," Cunningham said. "Synthetic CLOs are the topic of the day," said Rick Michalek, senior analyst in the structured finance group at Moody's Investors Service in New York. "We are seeing a lot of interest."
